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I loaned a spare tire to a friend last summer when she left a restaurant to find her front tire was flat. For the next few days though, that meant that I drove around without a spare. It was a somewhat uneasy feeling.

I had a similar experience last weekend. I took my bike out for the first ride of the season. My intention was to stay close to home and be back within the hour, but it was a nice day and I soon found myself on the other side of town. It would have been a great ride, but there was this unsettling feeling in my mind because I didn’t bother to bring along a spare tube. If I got a flat tire, I was going to have to scroll through my cell phone contacts in hopes of finding someone who would give me a ride home.  I didn’t like the thought of having to bother someone, especially on Memorial Day. I knew that I shouldn’t have been riding without a spare.

If you’ll give me some liberty with this analogy, I’ll explain how I think it relates to the current economic environment. In 2008 and 2009 the U.S. economy got a flat tire. Economists call it a recession. It’s technically defined as a decline in GDP for two or more consecutive quarters.  In layman’s terms that means at least six months of tough times. The U.S. government and Federal Reserve responded to these difficult economic times by utilizing every traditional tool at their disposal. Most notably, they lowered interest rates to spur credit purchases. They even created additional measures in recognition that the traditional tools wouldn’t be sufficient for a recession of this magnitude. They sent out millions of checks, issued and then repurchased their own debt to keep mortgage rates low (yes, reread and think about that for a second) and offered cash for all sorts of big ticket items like homes, clunkers and appliances. The list goes on.  By one measure, the efforts were a short-term success. Economic growth recovered.  

Even if we temporarily ignore who is going to pay for all this government support, a secondary concern must be considered. What tools are available to combat the next recession? We know there will be another recession as they are a very normal component of the economic cycle. We’ve experienced them every few years for the last century. Technically the recession of 2008-2009 has passed. But if history is any guide, that also means we are due for another recession in a few years. We can’t blindly dismiss the idea that another recession will present itself. That’s like saying my bike tire will never go flat again. Wishful thinking.

I’m suggesting two things: First, we’ve used our spare tire and are now driving around without the ability to properly respond to the next recession. Second, this is relevant to your current investment decisions.

Recognition of the first point gives me that same uneasy feeling I had last weekend. In the past one could assume that we could simply issue more debt to ease the burden of on those who had become unemployed and spur consumer spending with additional incentives. Today I’d argue that a similar suggestion is evidence that we haven’t been attentive to those who are financing that debt. China, the world’s largest holder of U.S. government debt has recently suggested that we need to get our act together.  In other words, stop spending money you don’t have and devaluing the U.S. dollar in the process. It’s worth noting that although China’s success is tied to our own, when you are spending someone else’s money, you best listen to what they have to say.

This issue is relevant today regardless of the timing of the next recession. The latest economic downturn has been softened by the previously mentioned government interventions. It’s fair to say the next recession will be more severe if these measures aren’t available. The timing of the next recession is key. Some have argued for the potential of a double dip recession (another downturn in the near-term). Others suggest an economic recovery may take hold and presumably postpone the next recession for a few years. Regardless of your viewpoint, keep in mind that markets are always forward looking. That’s one reason why the current economic data is so important.

In sum it appears that the days of easy money (or unlimited spare tires) may be numbered. I don’t know much about fixing bikes and even less about cars, but I know that neither one of them move as well as I might hope with a flat tire. And I know that I’m in even more trouble if there isn’t someone in my cell phone that I can call to bail me out. The prudent investor should prepare accordingly.